Obeying EU Rules

German Budget Deficit Plunges to 1 Percent of GDP

After violating European Union deficit rules in recent years, Germany's budget shortfall in 2011 plunged to just 1 percent of gross domestic product, well below the 3 percent limit. The economic outlook for 2012 may be improving as well.

Greece, Portugal, Italy and Spain may hog most of the negative press when it comes to debt in Europe. But Germany too has been in violation of European Union budget rules in recent years, posting a deficit of 4.3 percent of gross domestic product (GDP) in 2010, well above the 3 percent maximum imposed by the Maastricht Treaty.

On Friday, though, Germany's Federal Statistics Office announced that the country's deficit plunged in 2011 and, at 1 percent, is now well within EU limits. The healthy outcome was primarily the result of strong economic growth of 3 percent in 2011, which boosted tax revenues. Whereas the country's deficit was over 100 billion in 2010, it plunged to just 25.8 billion last year.

Still, there are concerns. The Statistics Office confirmed a preliminary announcement made earlier this month that the German economy had contracted by 0.2 percent in the fourth quarter of 2011. The drop was largely due to a 0.8 percent fall in exports following third quarter growth of 2.6 percent. Furthermore, it was announced earlier this week that German tax revenues had fallen in January for the first time since the summer of 2010.

The economic slowdown mirrors the difficulties facing the European Union. On Thursday, the European Commission forecasted that the euro-zone economy would contract by 0.3 percent in 2012 and expects eight of the zone's 17 member states to enter recession. Leading the way into the red will be Greece, with a forecast contraction of 4.4 percent. As recently as last November, the European Commission had forecast euro-zone growth of 0.5 percent.

Germany, however, is expected to buck the trend along with France. Growth in the two countries is to be 0.6 percent and 0.4 percent respectively, according to Commission forecasts. "The outlook for the German economy improved perceptibly," said the German central bank in a statement released earlier this week.

And despite the drop in demand for German exports in the euro zone, forward looking indicators are strong. A key business sentiment survey performed by the Munich-based Ifo Institute rose to its highest level in seven months in February.